In October, I am on record saying that we are in a bear market, as dictated by the 200-day moving Average (MA) indicator. This occurred on 10/23/18, when the S&P closed at 2,753.25, and on the 24th when the Dow Industrial closed at 24,583.42. Critically important, and it is like and night and day, is that this happened when the 200-day MA was “sloping downward”, and the S&P 500 and the Dow Industrial both closed below the MA.
The other long term (technical) indicator, that is on par as a “superior” indicator with the 200-day MA, is “Dow Theory”, which had not yet been confirmed. Moreover, this was accomplished on 12/10/18, when the Transports closed below its primary low (9,896.11) at 9,876.54: See the movement classifications.
Dow Industrials
Top 10/3/18: 26,828.39
Primary decline 10/29/18: 24,442.92 - 8.9%
Correction rally 11/8/18: 26,191.22 (% correction of the decline = 73.3%)
Second primary leg (so far) close as of 12/21/18: 22,445.37 - 15.1%
(PS - The median decline for the Dow in the 2nd leg of a bear is 20% = 20,952)
Dow Transports
Top 9/14/18: 11,570.84
Primary decline 10/29/18: 9896.11 - 14.5%
Correction rally 12/3/18: 10,850.44 (% correction of the decline = 57%)
Second primary leg (so far) close as of 12/21/18: 8,874.79 - 18.2%
(Please note that I have done this type of measurement classification from 1939, following Robert Rhea’s work, and who was a great Dow Theorist , who classified movements back to 1896). All the movements are within 10% of their medians for the last 123 years! This means that it is very typical.
The reason is the usual suspect - THE FED(!), nothing else. Over 20 government shutdowns have occurred since 1976 - they have meant nothing. The “trade wars” have been in play since January. The Fed had its 2018 3rd rate hike in September, (8 since Trump was elected) and including adding to the sale of the Fed’s balance sheet, which was seen as too aggressive, while the world is slowing. This was a poor decision, and easily understood by many professional observers. I strongly believed that an increase in rates would cause the markets to fail 5%! I was far too conservative - the S&P fell 7.4%; NDX 100 fell 8.3%; and Russell 2000 fell 8.4%; for the worst weekly decline since 2008. It’s highly likely there is a recession next year in the US and most other major nations. Europe is a disaster with the 3 biggest nations in the EU - Germany, England, and France - all having major problems with their leadership, and all looking like they all will be ousted. The so called “Yellow Vest” movement of France is spreading throughout Globalist Europe. President Macron has an 18% approval rating - a dead man walking; Teresa May (of the UK) can be upended any day due to her weak Brexit politics; and Merkel has already stated she will not run again. Keep in mind that 45% of the S&P earnings is from overseas. Add Japan and China economically, as both are slowing materially. The EU and Japan cannot lower rates, as they are at negative rates already, and they will not lower taxes, so they are on the Titanic that just hit the iceberg. The markets tell the tale: In January 2018, the Shanghai Composite, Hong Kong (the Heng Sing index), Ibex 35, Topix, and Nikki 225 all topped. The latter tested the January high in October, then plunged over 17% with the USA.
In May 2018 the FTSE (Footsie) 100 topped along with the DAX, CAC, Straits, and Singapore stock indexes, all topped. No mercy, as the FAANG stocks, or Facebook, Amazon, Apple, Netflix, and Google – all closed at lows for the year, while Apple, Facebook, and Google are now DOWN for the year?! Also see the signs of defensive investments as US Bonds and Notes, Gold+Silver, and the Yen were all up last week.
With commodity indexes at new lows, this all points to deflation and lower/down GDP. Who do you believe your wallet or your CNBC favorite economist?
In the US, it is constantly repeated that “the Economic Fundamentals are strong”. Of course?! NEVER in history have stocks gone up, when the economy has begun to weaken, and is “going into a recession”? The economic data are LAGGING INDICATORS. So far in December, the S&P is down 12.5%! The market leads the economy by 6-9 months. True, in contrast, sometimes the market has declined without the economy going into recession. But this is because the market doesn’t predict “only recessions”, but adjusts to all potential problems of all kinds, including war. For example, in 1962, President Kennedy threatening steel companies because of steel prices increases. The Dow dropped 26% in 3 months, as this was seen as Socialism at the time. In 1966, President Johnson’s inflation created by his guns and butter policies, caused the Fed to raise rates. But 7 months later, the Fed changed its mind. and the markets rallied before a recession was classified. In October 1987, James Baker threatened Germany with a dollar devaluation - but within days Baker recanted, after the crash, so no recession. Thereby, the equity markets decline for many reasons, when problems may occur, but then adjusts quickly when the problems are corrected. The “economy” basically declines because of a decline in earnings coupled WITH a recession. As one of the greatest Dow Theory proponents so accurately stated, “When coming events cast their shadows before, those shadows fall on the New York Stock Exchange.”- William Peter Hamilton
Historically the 200 MA is the #1 indicator, and Dow Theory #2. They have earned 18.5% and 18% respectively. This comes from a study published in a book in 1968 from William Gordon, Associate Editor of Indicator Digest Inc. From 1900 to 1966, he studied 10 major Indicators of the time. The two best were the ones mentioned. I have carried the studies forward and found similar results. He did not go short on sell signals, and neither did I, but I put the cash from the sales into 1-year T-Bills when sell signals occurred until a buy signal took place. These long-term signals are not influenced by computer trading, as is the norm today for very short-term movements. So, they are as good as it gets to help guide you through the long-term trends. But they are not infallible, as the first tenet of Dow Theory states. But in the long term they keep you, and your principal intact. Also, very few money managers will outperform these results.
Now for Fundamentals
The Fed decided to show its muscle to the world, and would not be swayed by several WSJ editorials and great money manager Stanley Drunckenmiller, with former Fed Member Kevin Warsh, in a WSJ opinion 12/17/18 “Fed Tightening? Not now”. Not to mention President Trump’s plea to not raise rates. All four Trump appointments voted against his attempted plea to “not raise rates too quickly”, along with the Reserve bank heads for a 10 to 0 vote. (I would love to know if any members sold stocks before the vote?)
Trump appointments were Powell, Clarida, Quayle’s, & Bowman, while two more are open waiting for confirmation. The other FOMC members appointed by Obama, aside from Powell was Brainard. John C. Williams was head of San Francisco’s Reserve Bank, before going to Head the NY Fed.
2018 Committee Members.
Jerome H. Powell, Board of Governors, Chairman
John C. Williams, New York, Vice Chairman
Thomas I. Barkin, Richmond
Raphael W. Bostic, Atlanta
Michelle W. Bowman, Board of Governors
Lael Brainard, Board of Governors
Richard H. Clarida, Board of Governors
Mary C. Daly, San Francisco
Loretta J. Mester, Cleveland
Randal K. Quarles, Board of Governors
Alternate Members:
James Bullard, St. Louis
Charles L. Evans, Chicago
Esther L. George, Kansas City
Eric Rosengren, Boston
Michael Strine, First Vice President, New York, Federal Reserve Bank Rotation on the FOMC
The evidence shows this rate increase was done on purely political grounds, in my view.
See the Fed Projections from the 2018 December meeting:
Compare the 2017 December projections with The Fed Projections at the December 13, 2018 FOMC Projections
December 13, 2017: FOMC Projections materials, accessible version:
You’ll see that the Fed projections in December 2017 for 2018, showed GDP was to be 2.5% for 2018, but is coming in at now 3%+ (4th quarter GDP is estimated at 2.7% by the Atlanta Fed) with Inflation projections unchanged at 2% to 2.1%, and GDP growth was forecast to be 2.1% in 2019. But now at the “2018 meeting” GDP is projected to be only +2.3% for 2019.Fed Funds has been moved up 50 bps and GDP up .25 to 2.3%. Why? With no inflation changes? (It should be noted that the GDP real growth rate from January 2010 was 2.2%, while Fed funds were zero with two huge QE’s, and operation twists were executed adding $3 Trillion to the Feds balance sheet. Under Trump, the Fed raised rates 8 times in 2 years +selling debt i.e. super tightening with no inflation. The only conclusion is the Fed is targeting high GDP growth WITHOUT INFLATION?
Oil is down 40% in from10/3/18, the high, and to repeat all Commodity indexes made new lows, while 10-year TIPS notes made lows on 11/2/18. Also, as all future years for inflation are at 2.1%? The changes and misses by the FED are due to Keynesian models, as they do not weight supply side tax cuts or lower regulations AND HAVE BEEN DEAD WRONG? The reduction of growth in 2019 by the Fed is coupled with the Fed reducing their holdings of US and mortgage debt by $50 billion a month to the tune of $600 billion a year for several years. Add the decrease of the monetary base by (-11%) this year and only a +4% increase in M2, from the St Louis Fed tables and charts, and you have a virtual guaranteed beheading of the economy. Therefore, the fed intends to stop the growth in the economy, and thereby Trump in 2020. What Mueller and his 17 Ninjas could not do, Powell did!
The moral of this story is, only focus on what the politics of Gov’t agendas are, not on rational cause and effects of what should be done.
The bear market is within sight, and with the politics against growth, pushed forth by the Fed, one should expect a 2008-like stock market decline, and then a recession. Powell is smiling as he can’t be fired without cause! But sadly, the power game the Fed plays reminds one of Ephesians.
Ephesians 6:12 “For our struggle is not against flesh and blood, but against the rulers, against the authorities, against the powers of this dark world and against the spiritual forces of evil in the heavenly realms.”
Good luck - as anyone who is long stocks, will need lots of it.
Victor Sperandeo
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